How a Reverse Mortgage Works After the Borrower’s DeathWhen the last surviving borrower on a reverse mortgage loan passes away, the loan becomes due and payable. The amount due is equal to the full loan balance, which is the sum of the borrowed amount, interest, and other charges. Here’s an overview of how your client and their family can expect the reverse mortgage to work after death.
5 Things to Know About
- Notification of Death: Upon the passing of the last surviving borrower, the lender must be notified. This can be done by a family member, the executor of the estate, or an attorney.
- Estate Responsibility: The responsibility of repaying the loan falls onto the estate of the deceased borrower, which is usually handled by a representative known as the executor.
- Repayment Options: The estate has several options for repaying the loan, including selling the property, paying off the loan with other assets (this is typically done to retain ownership and pass the home to another family), refinancing the loan, or allowing the lender to retain the property as repayment. If the sale of the property does not cover the loan balance, the estate is not personally responsible for the difference. This is covered by the “non-recourse” feature of a reverse mortgage.
- Reverse Mortgage Insurance Premium (MIP): Home Equity Conversion Mortgages (HECMs), are the most common type of reverse mortgage and are insured by the Federal Housing Administration (FHA). This insurance protects the estate from owing more than the property's value.
Our jumbo reverse mortgage, the Smartfi® Choice, does not have MIP. However, it still has the non-recourse feature that protects the estate from owing more than the property's value when the loan comes due.
- Time Frame for Repayment: Upon the last surviving borrower’s passing, the estate must begin communication with the Servicer as soon as possible. Generally, the estate will need to use any of the repayment options listed above to repay the loan balance within six months of the date of death. However, up to two 90-day extensions may be granted, as long as the following are met:
- Communication with the Servicer began early in the loan repayment process
- Specific documentation is submitted to support the need for the extension(s)
ConclusionIn conclusion, a reverse mortgage loan must be paid back after the passing of the last surviving borrower. The estate is responsible for repaying the loan, and has several options for doing so, including selling the property, paying off the loan with other assets, or refinancing the loan. Typically, the loan is repaid within six months of the date of death, but extensions may be granted. Your client and their family should always speak with their attorney and/or financial advisor to determine loan repayment for their specific circumstance. The estate is generally not held responsible for any loan balance above the property’s value, thanks to the loan insurance.
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Reverse mortgage proceeds may affect the eligibility and payments of Medicaid, SSI and similar program benefits. All clients should be advised to seek guidance on their financial situation with their financial planner/advisor. A reverse mortgage is not suitable for all clients in all situations.